The IRS recently released draft versions of the 2026 Form W‑2 and Form W‑4, along with Treasury’s preliminary list of tipped occupations, as part of the rollout of the One Big Beautiful Bill Act (OBBBA, P.L. 119-21). The law, signed July 4, 2025, introduced above-the-line deductions for qualified tips, overtime premiums, and certain car-loan interest for tax years 2025 through 2028.
Curtis E. Tatum, Esq., Senior Director of Legal and Compliance at PayrollOrg, said these early moves are welcome but far from the finish line. “The OBBBA’s ‘no tax on tips’ and ‘no tax on overtime’ provisions, which would create some difficulties for the IRS, payroll professionals, and individual taxpayers in terms of compliance under normal circumstances, were made much more difficult for tax year 2025 due to the retroactive nature,” Tatum said. “The initial steps found in the draft 2026 W‑2 and W‑4 are simultaneously answering questions while raising others.”
What’s in the Draft Forms?
The draft 2026 Form W‑2 introduces new Box 12 codes for reporting qualified tips and overtime wages and splits Box 14 into two parts, with Box 14b reserved for a Treasury-issued tipped-occupation code. The draft W‑4 adds new lines to the Deductions Worksheet for tips, overtime, and car-loan interest, and includes a new checkbox for employees claiming exempt status.
“Assuming the final forms are similar to the drafts, we now know the codes for Box 12 reporting of the qualified overtime wages and tip income,” Tatum said. “We can also see how employees will be able to adjust their withholding to account for these and other OBBBA deductions.”
Planning for 2025: Relief and Uncertainty
The IRS confirmed that the 2025 Form W‑2 will not change, even though the new deductions apply for 2025. That means employers will not have W‑2 codes this year to report qualified tips and overtime, and the agency has not yet finalized how that information should be provided.
“We do know that the W‑2 isn’t changing [for 2025], but we don’t know what type of reporting of tips and overtime will be required for 2025,” Tatum said. “Once that guidance is released, payroll will need to adjust to report what is required and will need to communicate to employees why they are providing the additional information.”
Employee Confusion and Withholding Adjustments
Payroll teams are already fielding questions from employees who expect their tips and overtime to be tax-free. “Some employees have questioned why their tips or overtime wages continue to be taxed when they expect it to be tax free,” Tatum said. “Payroll has had to explain that the tips and overtime are still subject to FICA taxes and that the employees will get the benefit of a tax deduction on their individual tax return.”
Tatum expects another wave of questions next year when employees file their 2025 returns and see larger refunds. “It will then be up to payroll to provide guidance, without giving tax advice, of course, about the new Form W‑4,” he said, noting that the IRS Tax Withholding Estimator will likely be updated to reflect OBBBA deductions.
Treasury’s Broad List of Tipped Occupations
Treasury’s preliminary list of tipped occupations includes traditional roles like servers and bartenders, but also less conventional positions such as dishwashers, bakers, digital content creators, and even home electricians and plumbers. “I do think Treasury went as broad as they could with the list,” Tatum said. “There may be a bit of a learning curve for some employees who are in jobs that may not have traditionally been considered tipped positions.”
The list will be finalized through a formal rulemaking process, and employers will need to ensure that only tips from enumerated occupations are reported for OBBBA purposes.
Compliance Risks and Audit Challenges
The law’s $25,000 cap on deductible tips and income-based phaseouts could create compliance headaches. “I do think this will be tricky,” Tatum said. “Employers will need to put procedures in place to ensure that only tips for employees performing in one of the enumerated tipped occupations are reported.”
He also warned that employees might mistakenly deduct all overtime pay rather than just the 50% premium required by the Fair Labor Standards Act. Employers in states with different overtime rules may need to track two sets of numbers—one for state law and one for federal reporting.
What’s Next?
Tatum praised the IRS for moving quickly but said more detail is needed soon. “The early guidance stating that the 2025 Form W‑2 would not be changing alleviated a lot of worries,” he said. “Similarly, by providing the draft 2026 Forms W‑2 and W‑4, the IRS is giving as much lead time as they can to payroll and tax professionals. Obviously, more guidance is needed, especially as we are already nearing the end of the third quarter.”
For now, payroll teams should begin capturing data on qualified tips and overtime and prepare employee communications for the 2025 filing season.
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